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Tax Deduction From A(mortized Points)
To Z(oot Suits You Recently Gave Away)

By

Karen Hube Staff Reporter of The Wall Street Journal

Updated March 4, 1999 12:36 a.m. ET

Surely you don't want to overpay your taxes this year.

No one plans to give the Internal Revenue Service more than they have to. But many taxpayers cheat themselves each year by letting valuable tax deductions slip through their fingers.

Most people remember the more obvious deductible expenses, such as mortgage interest and large cash contributions. But numerous other deductions that homeowners, investors and workers frequently overlook can significantly trim a tax bill, many tax specialists say.

"Many people just don't know about certain tax benefits," says David Keating, senior counsel at the National Taxpayers Union in Washington, a taxpayer advocacy group. And, he says, it's unlikely the IRS will hold up a red flag for any taxpayer who misses one.

It pays to itemize deductions when they exceed the standard deduction, which varies by age and filing status, although the IRS sets certain limits. For example, the ability to take itemized deductions begins to phase out for both singles and couples with adjusted gross income of $124,500. And miscellaneous expenses are only deductible when they are equal to more than 2% of adjusted gross income.

For those who do itemize, here are some deductible expenses tax specialists say are among the most frequently overlooked:

Amortized points on a refinanced mortgage.

People who chased down 1998's ultra-low mortgage rates and refinanced home loans for the second or third time last year may be in for a big deduction.

Points on a refinanced mortgage usually are amortized, meaning spread over the life of the loan, and only the portion paid each year is deductible. But when you refinance again, any remaining amortized points that haven't yet been deducted on the previous refinancing become fully deductible.

For example, if you refinanced a mortgage and amortized $3,000 in points over 30 years, you would have a tax deduction of $100 a year. Let's assume you refinanced again after three years, having deducted $300 in points. You would be able to deduct the remaining $2,700 in amortized points in a single year, says Harvey Berger, an associate partner at Grant Thornton in Washington.

"If it's been two or three years since you last refinanced your mortgage, it's easy to forget to deduct those points," cautions Mr. Berger, who says he deducted more than $2,000 in amortized points on his own 1997 tax return.

A portion of legal and advisory fees.

Normally, attorney fees for divorce proceedings aren't deductible. "But the portion of the fees that relates to advice on the tax aspects of alimony and child-support payments is deductible," says Sidney Kess, a New York City tax attorney.

Similarly, you can't deduct expenses for hiring someone to draft your will. But expenses for estate planning, which is often part of creating a will, are deductible, says Lenard A. Silverman, a New York City accountant.

"When you're arranging to leave your dog to so and so, that's not deductible," says Mr. Silverman. "But when you're setting up a trust, that is."

In each of these cases, he says, "ask for an itemized bill."

State and local taxes -- all of them.

Most taxpayers know that state and local taxes are deductible on their federal tax return, but they often remember to deduct only part of them, says Mr. Kess.

"Many people look to their checkbook to see how much they paid to their state," he says. "But they forget to deduct the amount that was withheld from their paycheck," and that's usually much more, he says.

Some mutual-fund taxes.

If you are invested in foreign securities through your mutual fund, the fund may pay foreign taxes on any gains out of your account. Problem is, you also owe U.S. taxes on any gains. To avoid paying taxes twice, you can either take a deduction or a credit for the amount your mutual fund paid on your behalf to a foreign government.

Generally, you are better off taking it as a credit, because you get a dollar-for-dollar deduction on your tax bill, says Ed Slott, an accountant in Rockville Centre, N.Y.

In past years, the IRS required taxpayers to fill out Form 1116 for foreign tax credits. This year you only have to fill out a separate form if you are single with foreign taxes of more than $300, or a couple filing jointly with foreign taxes of more than $600.

Noncash charitable donations.

It might seem like a hassle to inventory clothes before giving them away to a local thrift store. But those old threads can add up, as can furniture, computer equipment, toys or other items you are ready to unload.

Consider the estimated value of an average old $500 suit, for example: $150, says Lisa Osofsky, an accountant in Iselin, N.J. "A reasonable value for old clothes is about 30% of the original cost," she says.

To be sure your donations are deductible, give to a charity registered with the IRS. Ask the charity if it is registered, or check if its listed on the IRS Web site (www.irs.ustreas.gov ). Also, "get receipts," says Ms. Osofsky.

Travel expenses to charitable work or events are deductible, too. Mileage is deductible at 14 cents a mile. Remember to keep a log of your mileage, or receipts if you pay for transportation.

Interest on margin loans.

The interest you pay when you borrow money to buy securities is deductible to as much as the amount of investment income in a year.

If you earn no or little investment income one year, you can carry any interest you haven't yet deducted into the future indefinitely. For example, if you paid $100 margin interest in 1998 and had $70 in investment income that year, you can deduct $70 of the interest and carry the remainder to deduct against future investment income.

Interest payments are only deductible from investment income, however, not capital gains that are taxed at the lower capital-gains rate.

Commuting to a second job or business-related classes.

There is an upside to moonlighting, after all. Some of your travel costs are deductible. And the same goes with getting to and from a class related to your occupation.

Mileage is deductible at 32.5 cents per mile. If you use local transportation, you can deduct your fare.

Oddball deductions.

Keep an eye out for deductions that are specific to your state or municipality, says Elizabeth C. Burton, national coordinator of state and local taxes at Grant Thornton.

For example, some cities, such as Oak Bluffs, Mass., impose personal property taxes, on such things as automobiles, which are deductible on federal and state returns. And in California, taxpayers can deduct a portion of their car registration costs from their state taxes.